Yesterday, New York State Attorney General Andrew M. Cuomo announced that he has discovered "deceptive practices" in the relationships among postsecondary institutions and lenders. In February, Cuomo sent a letter to more than 60 colleges and universities across the nation requesting information on their practices that determine which lenders are included on the school’s preferred lender list. He charged "There is an unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest. The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law."
He released a press statement, a letter to over 400 college presidents, and a consumer information brochure.
The press statement said, "Industry practices revealed include: Establishment of so-called 'preferred lender' lists without disclosing the basis for selection or the specific benefits associated with these preferred lenders; revenue sharing and other financial arrangements between schools and lenders; denials or impediments to a student or parent’s choice of lender based on the borrower’s selection of a particular lender or guaranty agency; impediments to competition in the lending industry that stifle better loan terms for students and parents."
The NY Attorney General’s college presidents’ letter went even further, stating, "The following non-exhaustive list describes some of the problematic practices our review has disclosed to date:
- Financial arrangements between schools and lenders such as revenue sharing
and referral fees;
- Agreements between particular lenders and schools for services, benefits, or
payments in kind without disclosing the terms to potential borrowers; these
include 'preferred lender lists' where schools reap various benefits for 'steering'
student loans to certain lenders; and in such cases, the schools’ benefits may be at
a cost to the students;
- Establishment of preferred lender lists that include lenders that offered or were
solicited to offer, financial or other benefits to the school or its borrowers in
exchange for inclusion on the list;
- Establishment of preferred lender lists without disclosing to students and/or
parents the basis for selection, the specific benefits to the students and/or parents
of using the preferred lenders (e.g., competitive upfront rates, repayment benefits,
service), or whether any of the preferred lenders have agreements with each other
to sell the loans or whether they are otherwise related;
- Recommendations of a preferred lender without disclosing that advertised
repayment benefits may not travel with a loan if the loan is subsequently sold on
the secondary market; and
- Denials or impediments to a student or parent borrower’s choice of lender,
including but not limited to misleading prospective borrowers that they are
required to use a lender recommended by the school through counseling or other
means, unnecessarily delaying certification of a lender not recommended by the
school, or other practices that result in a denial of a borrower’s access to loans
because of the borrower’s selection of a particular lender or guaranty agency."
The NY Attorney General went on to make suggestions for schools to consider. The letter stated, "Some suggestions you may wish to consider as this loan season begins include:
- Students and parents should be fully informed of how the school constructed its
’preferred lender’ list and any financial benefits the school receives for placing a lender on the list.
- Students and parents should be able to comparison shop to obtain loans with the best
actual rates and terms (after factoring in repayment terms), without necessarily limiting
research to the school’s list of preferred lenders.
- Students have the right to the lender of their choice. When completing a Master
Promissory Note for a student loan, students and parents therefore are entitled to
substitute lenders of their choice for the school's preferred lenders on preprinted
documents or electronic menus.
- Students and parents should be able to make certain that ‘back-end’ benefits, such as
discounts for a certain number of consecutive timely repayments, remain part of the
agreement that travels with the loan if it is sold to another lender. Schools and students
should get these commitments in writing from the lenders.
- Students and parents should be informed that ‘signature’ loans from a school (‘school
as lender’) may be repurchased by a lender. Moreover, the school cannot require the
student to use the school as his or her Federal Family Education Lending Program
(‘FFELP) lender."
The letter concluded by describing a pamphlet developed by the NY Attorney General’s office to be distributed to guidance counselors in New York. The stated purpose of this "Student Lending" brochure was to provide "guidance to students and their families so that they will have the information they need to make smart decisions when choosing how to finance their education." Its four topical headings explained that
- "Under federal law, you have the right to use the lender of your choice"
- "The interest rates for Stafford and PLUS Loans are set by federal law"
- "Be aware that ‘signature’ loans from a university are likely to be sold to a lender" and
- "Make sure to keep copies of all the solicitation/advertising materials you receive from your lender or from your school"
NASFAA Responds to the Attorney General’s Statement
NASFAA issued a statement in response to the NY Attorney General’s announcement. It stated,
"NASFAA agrees with NY Attorney General Andrew Cuomo that preferred lender list abuses and real conflicts of interest must end. We agree that greater transparency is needed."
But NASFAA’s response went on to defend the student aid profession:
"Yes, NASFAA and Mr. Cuomo agree that more disclosure is necessary and the few abuses that have occurred must end. Financial aid administrators are the first to condemn colleagues who cross the line into unethical behavior. And so we invite Mr. Cuomo to visit financial aid administrators in New York and around the country to talk to them about their practices. He will find committed professionals with the highest ethical standards whose only concern is for their financial aid recipients and not padding their or their school’s pockets."
Other News Coverage
By Larry Zaglaniczny
NASFAA Director for Congressional Relations
Posted 03/16/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
